The bottomline on learning from China

India?s nuclear deal with the US, now before the Senate and House of Representatives, is a milestone of diplomacy for India. It leverages the geopolitical situation and a favourable personal equation at the leadership level to try to put India on par with the world?s official nuclear powers. Given the advantages to India, it is surprising to see some in India opposing the agreement on the grounds that one should not cooperate with George Bush. There are other reasons to criticise the deal, and those may still scuttle it in the US Congress, but the ?holier-than-thou? attitude that characterised India?s earlier approach to diplomacy was always a loser. Instead, India seems to be falling more in line with the Chinese realpolitik stance, to achieve some degree of nuclear parity with China. This fits in with an overall perspective of using China as a benchmark, especially for defining ends, though less so for the means to be used.

While the nuclear deal?s avowed purpose is to serve India?s future energy needs, one should take that objective with a grain of salt. There are other things that India?s policymakers can do that would provide greater immediate and lasting benefits, including more rational energy pricing and organisational reform of public sector energy suppliers. Nevertheless, energy supply will be important for India?s future growth, and economic growth should be the main end where India benchmarks itself against China. It is also where India falls short. Comparing how the two countries tackle some of the means to achieve this end of high growth is illuminating.

Begin with higher education. In March 2004, China announced some opening of the education sector to foreign participation. Six months later, a wide variety of joint ventures in higher education were under way. Last month, Pallavi Aiyar reported in the Asia Times that there are now over 700 foreign-affiliated colleges in China. Along with this injection of foreign organisational expertise have come successful attempts to hire internationally renowned faculty and host high quality foreign visitors. There has also been a shake-up of the incentive system in China?s universities, with a new emphasis on rewarding productivity and talent rather than seniority, and paying internationally competitive salaries.

In contrast, India produced a committee report last autumn on the entry of foreign universities, which is full of qualifications and restrictions that can only discourage investment: no ?poaching? faculty from Indian institutions; no repatriation of profits; no franchising or offshore campuses. The committee stipulated probationary periods and large security deposits, and suggested that only foreign universities from countries that offer Indian universities reciprocal opportunities abroad should be allowed entry. These conditions are designed to protect inefficiency in Indian higher education and restrict supply, rather than promote positive change and growth in a sector that is even more important than energy.

The report?s recommendations are bad economics (see my July 2005 column), and a resurgence of the license-permit raj mentality. This, in a country where, according to an anecdote from Raghuram Rajan, the IMF?s chief economist, quality higher education is in such short supply that there are coaching classes to prepare for entrance exams for other coaching classes, which then prepare students for the IIT entrance exams.

Next, consider research and deve-lopment (R&D). After some India hype associated with Bush?s visit, the US press returned to reality, which is that China is the country that matters most. A report in The Wall Street Journal on March 13 described a surge in foreign-invested R&D centres in China, its top place in the list of countries slated for R&D expansion by multinationals (with the US and India following), R&D spending well ahead of India?s (1.3% of GDP compared to 0.77% for India?translating to six times as much spending), and clear targets to boost spending and to train and attract talent. In contrast, India?s ?top official? is quoted as saying, ?the scale of investment is not much? because of budgetary constraints. India is ?trying to build R&D,? but the government does not have the financial resources or expertise, nor does it seem willing to allow those to come freely from abroad. According to the US National Science Foundation, China (with Israel) tops emerging economies in technological competitiveness, with India some distance behind.

Finally, consider venture capital. The Wall Street Journal on March 14 ran a headline ?Venture Capital Swarms China.? The story reported that a flood of venture capital is competing to fund tech companies, with funds raised by VC investors reaching $4 billion last year. This compares with well under a billion dollars of foreign investment for true venture deals (excluding late-stage private equity deals) in India. Of course VC investment in India has increased. The problem in growing it even more is India?s policy environment, with the persistence of needless government controls and interference.

The bottom line is that India has much to learn from China in areas of international economic policy, as well as foreign policy. Even if the government cannot become more efficient in its basic functions, it can at least create an enabling environment for foreign capital and expertise to enter more freely in areas where they can make a long run difference to India?s growth: higher education and R&D. This will ultimately be more important than matching China in foreign policy and nuclear prestige, and more fitting with India?s new global confidence.

The writer is professor of economics, University of California, Santa Cruz